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Overhead Variances and Management Control: II. Chapter 8. Overview: Overhead Variances. VOH vs. FOH Features of a standard-cost system Calculation of VOH variances VOH Efficiency variance Calculate FOH variances Production-volume variance—meaning 4, 3, 2, 1 OH variance analysis

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overview overhead variances
Overview: Overhead Variances
  • VOH vs. FOH
  • Features of a standard-cost system
  • Calculation of VOH variances
    • VOH Efficiency variance
  • Calculate FOH variances
    • Production-volume variance—meaning
  • 4, 3, 2, 1 OH variance analysis
  • J.E.s for MOH variances—which are favorable?
  • Balanced Scorecard
standard cost system
Standard Cost System
  • Simple recording system
    • Cost to run system is relatively low.

All output units are costed at standard—no need to keep track of the actual costs/unit or the use of allocation bases.

voh variances useful approach to calculate
VOH Variances: useful approach to calculate

Actual“no name”FlexibleBudget



AQ Alloc.base used


BR/unit Alloc.base

For actual output:

BQ Alloc.base


BR/unit Alloc.base

For budget output:

BQ Alloc.base


BR/unit Alloc.base



|----Spending V-----|------Efficiency V------|

variable overhead cost variances in class example
Variable OverheadCost Variances: in-class example

Larry’s Machine Shop uses machine hours as the base to allocate VMOH. Larry budgeted output of 10,000 units using 7,500 machine hours. Budgeted VMOH cost per unit of output is $15.

Actual output was 12,000 units, actual machine hours used were 11,000 hours, and actual VOH rate was $16 per unit of output.

Calculate the: Static Budget, Sales-volume, Flex., Spending (price), and Efficiency (usage) variances.

voh efficiency variance
VOH Efficiency Variance

The efficiency variance that we calculated for direct inputs relates to how efficient we used the direct input (materials, labor).

The VOH efficiency variance addresses how efficient the cost allocation base was used.

If you want to calculate the spending or usage variance of any specific item in the cost pool, then you have to take it out of the OH pool and trace it directly.

foh variances calculation
FOH Variances: calculation




Lump sum

For actual output:

BQ of Alloc.base


BR / unit Alloc.base

|-------- Spending -------|-------- Production Volume -------|

|------------- Over or under-allocated FMOH -------------|

* Standard costing is assumed.

fixed overhead variances
Fixed Overhead Variances
  • There is no:
    • “flexing” of FMOH.
    • sales-volume variance
    • efficiency variance
  • The spending variance is also called:
    • Static-budget variance
    • Flexible-budget variance
flexible budget variance
Flexible-Budget Variance

Actual Costs



Flexible Budget:


Fixed Overhead


$14,000 U

Fixed overhead spending variance

(Fixed overhead flexible-budget variance)

production volume variance
Production-Volume Variance

Flexible Budget:


Fixed Overhead


Fixed Overhead Allocated Using

Budgeted Input Allowed for

Actual Output Units Produced


$66,000 U

Production-volume variance

10,000 × 2.00 × $11 = $220,000

fixed overhead variances11
Fixed Overhead Variances

Fixed overhead variance

$80,000 U*

P. Volume variance

$66,000 U

Spending variance

$14,000 U

* FOH was under-allocated by $80,000

production volume variance interpretation
Production-Volume Variance: Interpretation

Management may

have maintained some

extra capacity.

Production volume

variance focuses

only on costs.

This variance results from “unitizing” fixed costs.

** Not much economic meaning to the production-volume variance.**

interpreting the production volume variance
Interpreting the Production-Volume Variance

Had Pasadena manufactured

13,000 suits instead of 10,000,

allocated fixed overhead

would have been = $286,000

(13,000 × 2.00 × $11).

No production-volume variance

would have occurred.

4 3 2 and 1 moh variance analysis
4-, 3-, 2-, and 1-MOH variance analysis.

It is an issue of the level of aggregation desired.

Most organizations use 3- or 2-variance analysis for MOH.

integrated oh analysis
Integrated OH Analysis

Variances: SpendingEfficiencyProduction-volume

4-variance analysis presents the most detail:

VMOH $4,300 U $220 F Never

FMOH $1,340 F Never $700 F

3-variance analysis:

Total MOH $2,960 U $220 F $700 F

2-variance analysis:


Total MOH $2,740 U $700 F

1-variance analysis: Total OH Variance

Total MOH $2,040 U

journal entries for overhead costs and variances
VMOH-allocated $240,000

VMOH-efficiency Var. 18,000

VMOH-control $244,775

VMOH-spending Var. 13,225

(To isolate variances for the accounting period)

Which are favorable (debit or credit entries)?

Journal Entries for Overhead Costs and Variances
financial and nonfinancial performance balanced score card
Financial and Nonfinancial Performance—Balanced Score Card

Overhead variances are examples of financial performance measures.

What are examples of nonfinancial measures?

Actual labor time, relative to budgeted time

Actual indirect materials usage per labor-hour, relative to budgeted indirect materials usage